Do you have agreements with the government or with anyone who does business with the government? Or are you affiliated with anyone who does business with the government? If you do not consider yourself a government contractor but your answer is yes to either of those questions, you may want to make sure that government contractor obligations have not crept into your company’s portfolio of contracts.

In particular, you should consider whether you have compliance obligations arising from certain employment-related rules. If you have those obligations but are not familiar with them, you may be violating them unknowingly. Such violations might be costly, as shown by the October headlines of the $5 million settlement that State Street Corp., an asset manager, entered into with the Office of Federal Contract Compliance Programs (OFCCP).

The potential obligations and their general applicability

Three employment-related rules apply to agreements or modifications of agreements between a federal agency and another party for the “purchase, sale or use of personal property or nonpersonal services.” Nonpersonal services include utilities, construction, transportation, research, insurance and fund depository. The three rules are:

  • Executive Order 11246, as amended (currently found at 41 CFR Part 60-1, Subpart A);
  • Vietnam Era Veterans’ Readjustment Assistance Act of 1974, as amended (currently found at 38 U.S.C. § 4212, 41 CFR 60-300); and
  • Section 503 of the Rehabilitation Act of 1973, as amended (currently found at 29 U.S.C. § 793, 41 CFR 60-741).

Generally speaking, the three rules require that a company adhere to stated policies and affirmative actions that prohibit employment discrimination based on (a) race, color, religion, sex, sexual orientation, gender identity or national origin; (b) certain classes of veterans; or (c) a person’s disability or disabilities. They further require the company to (i) provide certain safeguards for employees under these clauses; and (ii) include these requirements in its subcontracts and purchase orders that are above a certain monetary threshold.

Such policies must be more than in name only. Indeed, the government will look at statistics relating to a company’s hiring and promotions history to ascertain whether a company has complied with its obligations.[1]

The stealth application of the obligations

An entity that does not focus its day-to-day work on government contracts may be surprised to learn that an executive order, statutes and regulations apply to its human resources and employment considerations. Indeed, earlier this year, an administrative law judge found that media weather company AccuWeather was a government contractor, subject to OFCCP jurisdiction.

The issue was in front of the judge because the company, which had at least two government contracts (worth less than $100,000 combined), refused to comply with an on-site audit, “on the belief that AccuWeather is not a federal contractor subject to Executive Order 11246.”

The potential for such a surprise is compounded by the fact that these obligations may apply to an entity even if these clauses are not in any of its agreements. In particular, there are three common ways that one or all of these obligations may sneak up on a company, even if it had been diligently monitoring its agreements for federal contract clauses and potential government contractor obligations.

Indeed, to the surprise of many companies, the obligations apply when:

  • The company has an agreement with a federal agency, and the government should have included the appropriate contract clause but did not. The regulations explicitly state that the obligations apply to contracts with the government regardless of whether a clause was properly included in the contract.[2]
  • The company is a subcontractor to a contractor that should have included the clause in the contract between the parties. The regulations (and for the latter two rules, the statutes) also explicitly state that the obligations apply to subcontracts regardless of whether a clause was properly included in the subcontracts.[3]  
  • The company is an affiliate of another company with government contracts, and the affiliates have such a close (or “integrated”) relationship that the U.S. Department of Labor considers the two companies to be a “single entity.” The Department of Labor uses a five-factor test to determine whether it will consider affiliated entities to be a single entity.[4] If it determines that they are a single entity, then the employment-related obligations apply to all parts of the entity.

What a violation means

Not all violations of a company’s obligations under the employment-related rules will require much remediation, but some will. Depending on the violation and the company’s posture, the government’s remedies can place a heavy burden on the company.

In particular, if the company is willing to correct the violation, the agency may enter into a “conciliation” agreement that provides for the company’s correction of the violation.[5] If, however, a company refuses to comply, the agency has a variety of enforcement mechanisms it can use. Depending on the violation, the agency may:

  • Seek back pay and other relief for the victims of discrimination.[6]
  • Seek to enjoin violations.[7]
  • Refer matters to the U.S. Department of Justice with a recommendation that the Department of Justice institute judicial proceedings.[8]
  • Impose administrative sanctions such as:
    • Withholding progress payments.[9]
    • Terminating or canceling the contract.[10]
    • Debarring the contractor from receiving future contracts, modifications or extensions of existing contracts.[11]

The current administration recently appointed Ondray T. Harris the director for the OFCCP, the person who guides the Government’s approach to enforcement of these rules, and it is currently unclear exactly how he will guide enforcement. Nevertheless, the settlements announced since January 20, 2017 show why companies that are within OFCCP’s jurisdiction should pay attention to the rules regardless of how that enforcement takes shape.  

First, the public settlements show that many of the companies that the agency audits or investigates are not traditional government contractors that focus their work on federal contracts. Indeed, settlements have been reached with an asset manager (State Street Corp.); a retailer of imaging, audio and video equipment (B&H Foto & Electronics Corp.); an auditing firm (KPMG); and a bank (Bank of America).

Second, the settlements illustrate that OFCCP enforcement of violations crosses presidential administrations, so a current administration’s stance may not guarantee protection in the future. Indeed, the Bank of America case arose from an audit that was conducted 24 years ago, and the case was pursued through four presidential administrations.

Finally, the settlements illustrate that noncompliance can be costly. As stated above, the settlement with State Street Corp. was for $5 million, including back pay and interest,[12] and the settlement with B&H Foto was for $3.2 million.[13]

What can you do?

Given the potential ramifications that a company could face for violating the employment-related rules, companies that do business with or receive funds from the government or its contractors, or who are affiliated with government contractors, should be diligent in understanding their employment-related obligations.

If your company fits any of those descriptions, you should take steps to make sure that you are currently compliant and that you will remain compliant. In particular you should:

  • Assess your current agreements in light of the statutes and regulations and determine whether any employment-related obligations apply to your company.  
    • If you determine that the rules apply to your company but you have not been following them, discuss the issue with counsel experienced in OFCCP enforcement and ascertain how you may best remedy the non-compliance.  
    • If you determine that the rules do not apply to your company but you work in areas that often have government funding, monitor your future agreements for the potential of such obligations.
  • Assess your current affiliations in light of the Department of Labor’s five-factor test.  
    • If you determine that your company is a single entity with another company that has covered government contracts, but you have not been following the rules, discuss the issue with counsel experienced in OFCCP enforcement and ascertain how you may best remedy the non-compliance.  
    • If you determine that your company is a single entity with another company that does not have government contracts but works in areas that often have government funding, ensure that the companies keep lines of communication open so that you know if and when your company does have to begin complying with the rules.If you determine that your company is not a single entity with another company, keep the rules mentioned above in mind when contemplating mergers, acquisitions or other business dealings that may lead to your company being affiliated with another. 

Following these steps may result in some unexpected cost or inconvenience for your company, and those issues will undoubtedly factor into how much attention your company may pay to these rules.

What should not impact your decision, however, is any presumed posture of the new OFCCP director or the current administration. As discussed above, OFCCP has continued to address cases brought under prior administrations. Furthermore, the company’s current actions may be subject to a review under a future administration.